KEN FEINBERG'S 9/11 VICTIMS' FUND RULES VERSUS CANTOR FITZGERALD'S CRITIQUE OF THE RULES:
What Did Congress Intend To Be "Full Compensation"?

In the 9/11 attack, the bond trading firm Cantor Fitzgerald lost 658 out of 1000 of its employees who worked in the World Trade Center. The company's loss is staggering, especially when one considers that the total number of people (including rescue personnel) killed in New York City during the attack is now estimated to be approximately 2500.

Earlier this year, Special Master Ken Feinberg promulgated his Final Rules of the September 11 Victim Compensation Fund of 2001 - the fund set up by Congress to compensate 9/11 victims. On September 12, Cantor Fitzgerald submitted a lengthy critique of the Rules.

On the surface, Cantor's critique--penned with the aid of Wall Street firm Skadden, Arps--raises some valid points about Feinberg's implementation of Congress's plan, which he may be able to adopt without much comment. But at a deeper level, the Cantor report is a blunt rejection of Feinberg's basic understanding of the purpose of the Fund.

Cantor believes that Congress intended, through the Fund, to give every family of every victim of the attack a sum of money equal to what they would have been awarded by a New York jury if they had sued in negligence. Feinberg, in contrast, thinks Congress did not want to reproduce the tort system through this taxpayer-funded scheme.

Whose interpretation is correct? This question could affect the award of billions of dollars of compensation, and may ultimately be decided by the courts.

The Fund, and How It Compared to Likely Court Damages Awards

As I described in a column last year, the Fund was the product of a political compromise forged in the frantic and frightened weeks that followed the terror attacks of 9/11.

The Fund began as a proposal to protect airlines involved in the hijackings that day from lawsuits. It quickly transmogrified into a massive offer to the victims of the attack (or more precisely, their families): agree not to sue the airlines, the owners of the WTC, the City of New York, etc., and the government will give you "full" compensation. (Families who reject the deal may sue, but only under some onerous conditions.

From the outset, some commentators, including myself, were surprised by the generosity of the Fund's offer. After all, under the typical rules of tort law, the chances of many of the victims' families (for instance, the many whose loved ones were in the buildings) winning negligence claims against the airlines should be very low.

But the devil, as they say, is in the details. The statute required the Special Master to deduct "collateral sources" (such as life insurance) from any award, a step not required under almost any state's current tort law. For that reason, plaintiffs might get less than they would if they won in New York court. (Again, though, victims who availed themselves of the Fund did not have to pay lawyers, or risk losing or getting a low verdict in court.)

Moreover, the Fund statute gave the Special Master tremendous discretion in the calculation of "full compensation." Ken Feinberg was the Special Master appointed by the Justice Department. He has used this discretion to impose his own vision of what the Fund should do.

Flattening the Curve For the Very Top Earners

Feinberg published tables of "presumed awards" in final form on August 27. The tables indicated how much a victim (or their family) should expect to receive if they entered the Fund and waived their right to sue.

One of the most noteworthy features of Feinberg's interpretation of the expression "full compensation" is his treatment of economic losses for very high income earners. The tables indicate that the Special Master would treat victims who were making more than 98% of the rest of the country as if they were in the 98^th percentile - not, say, the 98.5% or 99% percentile, or whatever was really the case.

That means, of course, that these 98^th percentile-plus families will get less than they would have, had the victims lived - though they will still get a very, very large amount.

All Victims Are Presumed to Have the Same Pain and Suffering

Another noteworthy feature of Feinberg's interpretation of "full compensation" is his treatment of noneconomic losses - such as pain and suffering.

The tables presume an identical amount of pain and suffering and noneconomic loss for everyone ($250,000 per victim and $100,000 per survivor). That avoids agonizing inquiries into how people died, and how painful it was - which is probably a good thing.

The Fund Versus the Tort System: Different Purposes?

In the comments to the Final Rule and elsewhere, Feinberg has explained why he has chosen to "flatten" the compensation curve at the very top, and treat all victims and families to "one size fits all" approach to noneconomic loss. The point of a government compensation scheme, Feinberg has suggested, is to reduce transaction costs, reduce uncertainty, and, direct money to those in need.

In contrast, the point of the tort system is certainly not to reduce transaction costs, reduce uncertainty, and, direct money to those in need. Its central purpose is to insure that individuals who are wrongfully injured are fully compensated for their past and future losses.

The Cantor report recognizes this, and highlights the degree to which the goals of the tort system are in tension with the goals Feinberg has set for the Fund.

But that leads, of course, to the question whether Congress wanted to truly mirror the tort system with the Fund in the first place.

Cantor's Attack on the 98^th Percentile Ceiling

Much of the Cantor report is taken up with showing that the techniques used by the Special Master to calculate the future earnings of victims understate the extraordinary economic potential of many of the company's employees.

As it says with regard to those young brokers whose lives were tragically cut off by the attack, "Cantor Fitzgerald hired the most promising candidates and kept only the best." Thus, Cantor argues, when calculating the expected lifetime of earnings cut off by the attack, they recommend that instead of using 3-10% annual growth rates which might match that national average, the Special Master should use growth rates based on historical performance of Cantor brokers - whose income rose between twenty and forty-eight times within eight years of finishing training at the firm.

The real point of Cantor's report, in my opinion, is to attack Feinberg's 98% presumptive ceiling. The report says that more than 250 of Cantor's employees who were killed had incomes above the 98^th percentile. And presumably, if Feinberg were to adopt Cantor's other suggestions about the recalculation of economic loss (such as employing brokers' actual growth rates), even more employees would fall above that line.

Feinberg's Responses to Cantor's Critique

Feinberg has a few responses to this. The first is that there is no cap--upon a showing of "extraordinary circumstances" based on a detailed factual record, the Special Master will modify the presumptive award available to someone at the 98^th percentile (up to between $2.6 million and $4.7 million, depending on family status and age).

This answer only begs the question, however: why should high earners be treated differently at all? The question isn't how they should be treated differently, Cantor believes, but why.

Feinberg's further responses put him on legally and politically tricky ground. In the commentary to the Final Rule he says that calculation for economic loss for persons earning beyond the 98^th percentile would be a "highly speculative exercise" and therefore the numbers generated for the 98^th percentile should be good enough.

Cantor's report points out, however, that it can provide a lot of information for the 99^th and 100^th percentile. This extra information, it argues, will allow calculation of their losses that are no less speculative than the calculations Feinberg adopted for the 98^th percentile.

Feinberg also implies in his comments that it is quite unlikely that families of earners in the 99^th and 100^th percentiles will need more in compensation than what families in the 98^th percentile will receive. After all, they will already be receiving very large awards.

To this argument Cantor has a simple response: the Special Master can't decide compensation based on need. Rather, Cantor argues, the law requires him to give compensation based on only one criterion: the actual earnings capacity of the victim, no matter how high.

Any other "non-neutral" basis for compensation, Cantor contends, is a usurpation of Congressional intent. Congress intended "full compensation" for high as well as low earners.

What Was Congress' Real Intent? Why Cantor's Claim Isn't Plausible

The problem with Cantor's argument is that it attributes to Congress an intent that makes no sense. Cantor claims that in intending to give victims full compensation, Congress intended the Fund to give every victim who waived their right to sue exactly the amount they would have received if they had won their tort case in court - meaning full economic and noneconomic damages.

But that is not what the Fund statute says. Rather, the Fund statute envisions a three-step process determining the compensation of an applicant to the Fund, and the process does not amount to a calculation of what the victim would have won in court.

The Fund's Three-Step Process, and Why It Isn't Equivalent to A Tort Award

Here are the three steps: First, the Special Master must determine "the extent of the harm to the claimant, including any economic and noneconomic losses."

Second, he must determine the amount of compensation, based on the extent of the harm and "the facts of the claim, and the individual circumstances of the claimant."

Third and finally, after having determined the amount of "compensation to a claimant is entitled" under Steps One and Two, the Special Master is obliged to reduce that amount by collateral sources received by the claimant (such as insurance awards).

Why did Congress put Step Two in? On Cantor's view, it is hard to explain - Step One alone should have been enough. Step Two makes no sense since compensation should be the same as loss. And Step Three is unfair because, as I mentioned above, courts generally don't deduct collateral sources.

But Congress did add Step Two - suggesting Cantor's view is wrong. Why? My explanation for Step Two is that Congress understood that it would be wrong and impracticable to equate compensation under the plan with the economic and noneconomic losses suffered by the victims, as they would have been awarded in court.

Why Congress Did Not View Compensation As Equaling Losses

First, Congress would have had to direct the Special Master to deduct one third of the victim's money for attorney's fees, and another portion for the high costs of the suit - depositions that would have had to have been transcribed, expert witness fees, and so on.

Second, Congress would have had to tell the Special Master to revise the awards down to account for the likelihood of settlement, and of court defeat. Only 2% of civil cases go to trial, and only 50% of those are won by torts plaintiffs. In the 98% of cases that are settled, plaintiffs do not get 100% of their economic and noneconomic losses, but a fraction of that amount.

Third, Congress would have had to tell the Special Master to look into the legal flaws and weaknesses in the victims' cases - and discount again for these flaws. (As I discussed in a previous column, as sympathetic as the cases may be, the law is not on the victims' side).

Fourth, Congress would have had to direct the Special Master to deduct for the modest rate of interest a court would award on the damages amount during the period between the case filing and the verdict - or, worse, for the possible failure of a settlement to take the plaintiffs' claim for interest during this period into account.

Once one adds up all the discounts, one sees that under the "facts" and "circumstances" of their claim, the Cantor victims suffered a loss equal to a portion of their actual economic and noneconomic losses as calculated in court - not equal to the entirety of these loses.

Moreover, since none of these discounts were made, it is likely that the 9/11 families - and even, indeed, the 98^th percentile-plus families - will receive more than they would have in court, assuming all these discounts. The Fund is not exact, but it is generous.

Congress's Invitation to the Special Master to Consider Alternatives

Another reason for Step Two, I believe, is this: I think there is a good reason that Congress, through the language in Step Two, invited the Special Master to consider alternative to calculating each of the discounts described above. The reason, I believe, is that Congress recognized that it is impracticable to reproduce in an administrative setting - with a single Special Master overseeing a staff - the kind of adversarial presentation, and legal factfinding, necessary to produce a fair estimate of the real loss suffered by the victims of the terror attacks of 9/11.

Feinberg's solution strikes me as eminently fair, given the language of the statute. Both major components - flattening the curve at the very top, and equalizing the noneconomic (pain and suffering) losses of all. Both of these go towards Congress's goal as expressed in Step Two.

The solution Feinberg settled on was a reasonable one. Offering sums that approximate lost income potential is a decent proxy for the plan's goals. Those goals, after all, include, among other things, expressing national solidarity with the victims of the attack - as well as the recognition that, by compromising the victims' right to sue, the federal government has interfered with their rights in a substantial way.

The important thing to realize, though, is that future economic loss is just a tool for the implementation of the Fund; it is not an end in itself, as Cantor's objections suggest. The concept of losses - which after all, only appears in Step One - should not be used once it no longer serves the Fund's larger purposes, and when the Special Master is moving on to Step Two, he should use the Congressionally-mandated concept of "compensation," which is independent of (although related to) the tort-based concept of "loss."

In short, Feinberg is right to have chosen to deemphasize future economic loss in calculating compensation for the 99^th and 100^th percentiles earners under this government program. Let us hope, then, that he will move on with his plan despite Cantor's critique.